FAR Limitation on Subcontracting Rules Are Finally Here!In 2016, the Small Business Administration (SBA) updated its regulations pertaining to limitations on subcontracting. Five years later, on August 11, 2021, the Federal Acquisition Regulation (FAR) Council finally followed suit by publishing two final rules that largely mirror the SBA’s rules. This is a welcome development for federal contractors, as the discrepancy between the SBA rules and the FAR rules on limitations on subcontracting has been a source of unnecessary confusion for half a decade. This article provides a brief overview of the new FAR rules on limitations on subcontracting.

Revision of Limitation on Subcontracting

In the first final rule published by the FAR Council on August 11, 2021, the FAR Council made the following “significant changes” from its earlier proposed rule on limitations on subcontracting:

  • The definition of “similarly situated entity.” The definition of “similarly situated entity” is revised at FAR 19.001 and in FAR clause 52.219-14, Limitations on Subcontracting. It now provides an example of entities having the same small business program status and specifies that the entity must be small under the size standard associated with the North American Industry Classification System (NAICS) code that the prime contractor assigned to the subcontract.
  • Applicable dollar threshold. The final rule reflects the clarification that the nonmanufacturer rule and the limitations on subcontracting apply to set-asides and sole source awards made pursuant to FAR subparts 19.8, 19.13, 19.14, and 19.15, as well as awards using the HUBZone price evaluation preference pursuant to FAR subpart 19.13, regardless of dollar value.
  • HUBZone price evaluation preference. Paragraph (e)(2) is added to FAR 19.507, Solicitation provisions and contract clauses, to clarify that, in solicitations and contracts using the HUBZone price evaluation preference, the contracting officer shall insert the clause at FAR 52.219-14, Limitations on Subcontracting. Paragraph (h)(1)(ii)(B) is added to specify that the contracting officer shall insert the clause at FAR 52.219-33, Nonmanufacturer Rule, in solicitations and contracts when the HUBZone price evaluation preference is used. For the FAR clauses at 52.219-14 and 52.219-33, the prescription also states that the contracting officer shall not insert the clause in the resultant contract if the prospective contractor waived the use of the price evaluation preference or is “an other than small business.”

The clause at FAR 52.219-4, Notice of Price Evaluation Preference for HUBZone Small Business Concerns, is revised to remove the proposed rule definition of “similarly situated entity,” and to delete (instead of revising) the now redundant paragraphs (d) and (e), which pertain to the limitation on subcontracting.

  • Limitations on Subcontracting. FAR clause 52.219-14, Limitations on Subcontracting, is revised to clarify that this clause applies to contracts using the HUBZone price evaluation preference to award to a HUBZone small business concern unless the concern waived the evaluation preference. Additionally, to provide clarification on calculating the 50% limitation for contracts that include both services and supplies (i.e., “mixed contracts”), paragraph (e)(1) of the clause at FAR 52.219-14 is revised to specify that when a contract is assigned a NAICS code for services, the 50% limitation shall only apply to the services portion of the contract. Paragraph (e)(2) is revised to specify that when a contract is assigned a NAICS code for supplies, the 50% limitation shall only apply to the supply portion of the contract.
  • Nonmanufacturer Rule. FAR clause 52.219-33, Nonmanufacturer Rule, is revised to clarify that the clause applies to contracts using the HUBZone price evaluation preference to award to a HUBZone small business concern unless the concern waived the evaluation preference. Paragraph (c)(2) is revised to remove text concerning an item for a kit that is not produced by small business concerns in the United States or its outlying areas.
  • Revisions to include recent FAR changes. Prior to publication of this final rule, FAR part 19 and its associated provisions and clauses were substantially revised as a result of FAC 2020-05 (effective March 30, 2020). As a result, some revisions in the proposed rule are no longer included in this final rule, because the revisions have already been made to the FAR in FAC 2020-05. Other revisions appear in a different location due to the changed landscape of FAR part 19. The final rule also contains certain revisions that were not in the proposed rule due to changes made in FAC 2020-05.

Good Faith in Small Business Subcontracting

The second final rule published by the FAR Council on August 11, 2021 — which made no significant changes to the FAR Council’s earlier proposed rule regarding “good faith in small business subcontracting” — provides examples of “activities that contracting officers may consider when evaluating whether the prime contractor made a good faith effort to comply with its small business subcontracting plan.” The final rule also provides contracting officers with “consistent and uniform examples to identify and hold large prime contractors accountable for failing to make a good faith effort to comply with their subcontracting plans.”

In addition, the final rule “requires prime contractors with commercial subcontracting plans to include indirect costs, with certain exceptions, in their subcontracting goals.” According to the FAR Council, “[t]his will ensure that the data reported in the summary subcontract report is consistent with the goals in the commercial subcontracting plan.”

Effective Date

Both final FAR rules are effective September 10, 2021, which is “30 days after publication in the federal register” on August 11, 2021.

If you have any questions about these noteworthy developments or any related issues, please feel free to contact Aron Beezley or Lisa Markman.

Read Your Contract: It May Cost You Your Arbitration AwardImagine receiving an arbitration award in favor of your client. You move to confirm the award, and the award is vacated because the parties failed to mediate prior to arbitration. That is exactly what happened in Burke v. Roberson.

In December 2020, the First Court of Appeals in Houston affirmed the vacatur of an arbitration award because a condition precedent to arbitration under the governing contract – i.e., mediation – was not satisfied or waived by the parties prior to arbitration. In affirming the vacatur, the court held that the dispute was never properly before the arbitrator and that the arbitrator therefore exceeded his powers in issuing the award.

Texas law favors arbitration, and the construction industry is no exception in the pursuit of finality and findings generally not susceptible to challenge. An arbitration award “has the same effect as a judgment of a court of last resort,” thus “all reasonable presumptions are indulged in its favor” (see Port Arthur Steam Energy LP v. Oxbow Calcining LLC). Under the Texas Arbitration Act, a trial court shall confirm an arbitration award “unless grounds are offered for vacating” the award. The exclusive grounds for vacating an arbitration award are set forth in Section 171.088, the relevant ground in Burke being when an arbitrator exceeds his or her powers. An arbitrator exceeds his or her powers “by deciding a matter not properly before” them.

In Burke, the agreement at issue stated: “any controversy which touches or concerns [the Agreement] shall be resolved by mediation, and if such mediation is unable to resolve the controversy then exclusively by binding arbitration.” The court held this conditional language established mediation as a condition precedent to arbitration. Unless and until the parties mediated, the court reasoned that the controversy was not properly before the arbitrator. Notably, the court was not sympathetic to the appellant’s repeated attempts to mediate with appellees prior to arbitration and held such “inaction” was not a waiver of their right to mediate.

While it was a straightforward decision and premised on the very terms the parties agreed to in the governing contract, the court’s decision in Burke is every client’s nightmare that affects all parties equally – i.e., the party attempting to confirm an arbitration award. The decision suggests a potential broadening of what courts consider an arbitrator exceeding his or her powers – and yet another basis upon which a seemingly final arbitration award can be vacated.

To avoid the result in Burke when faced with a similar agreement, the parties should either mediate as required under the agreement or enter into an agreed waiver of mediation. The parties can always mediate later on should they decide to do so.

Recovering Attorneys’ Fees for Breach of ContractTexas lawyers finally have the ability to recover attorneys’ fees on behalf of their clients in all breach of contract matters, regardless of whether the other party is an individual, corporation, limited partnership, or limited liability company. The Texas Legislature has expanded the scope of Chapter 38 of the Texas Civil Practices and Remedies Code, which currently only allows for recovery of attorneys’ fees from an individual or corporation, for actions arising out of breach of contract (Tex. Civ. P. & Rem. Code Ann. § 38.001 (West)).

The current language of Chapter 38 has perplexed attorneys because it omits a plethora of business entities that are often parties to a contract. As a result of the literal language of Chapter 38, Texas courts have offered little to no relief to those parties seeking to recover attorneys’ fees from other business entities. In Fleming & Assocs., L.L.P. v. Barton, the 14th Court of Appeals explained that neither the term “individual” nor “corporation” is defined in Chapter 38, and thus the ordinary meanings of these terms should be applied (425 S.W.3d 560, 575 (Tex. App. —Houston [14th Dist.] 2014, pet. denied)). Further, there was no dispute that Fleming & Associates was neither an individual nor a corporation, but a limited liability partnership —precluding the applicability of Chapter 38 and leaving Barton with no avenue for recovery of attorneys’ fees for breach of a joint venture agreement (see also Choice! Power, L.P. v. Feeley, 501 S.W.3d 199, 214 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (holding  Section 38.001 of the Civil Practice and Remedies Code does not permit recovery against a limited partnership Hoffman v. L & M Arts, No. 3:10-CV-0953-D, 2015 WL 1000838, at *1 (N.D. Tex. Mar. 6, 2015), aff’d, 838 F.3d 568 (5th Cir. 2016) (limited liability company is not a person under Chapter 38)).

The Texas Legislature has finally taken notice of these decisions and passed H.B. No. 1578. Under H.B. No. 1578, Chapter 38 will be revised to the following language:

(a) In this section, “organization” has the meaning assigned by Section 1.002, Business Organizations Code.

(b) A person may recover reasonable attorney’s fees from an individual or organization other than a quasi-governmental entity authorized to perform a function by state law, a religious organization, a charitable organization, or a charitable trust in addition to the amount of a valid claim and costs, if the claim is for:

(1) rendered services;

(2) performed labor;

(3) furnished material;

(4) freight or express overcharges;

(5) lost or damaged freight or express;

(6) killed or injured stock;

(7) a sworn account; or

(8) an oral or written contract.

Under the revised Chapter 38, a party can recover attorneys’ fees from an organization as defined in Section 1.002 of the Texas Business Organizations Code. The new revisions extensively expand the scope of Chapter 38, now allowing recovery against a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign (Tex. Bus. Orgs. Code Ann. § 1.002 (West)). The newly expanded Chapter 38 will offer an avenue of recovery to parties seeking attorneys’ fees from entities other than corporations, as long as they file suit after September 1, 2021.

H.B. No. 1578 has been signed by the governor and will be effective September 1, 2021.